Better Lending Standards Are Needed: FDIC's Bair

The head of the Federal Deposit Insurance Corp. said Monday that the U.S. needs better lending standards to avoid a recurrence of the 2008 financial crisis.

CNBC.com

Financial Crisis

FDIC Chairwoman Sheila Bair, speaking to an audience at the University of Kansas, said the U.S. needs to return to the sort of monetary values she learned while working at a Lawrence savings and loan after graduating from the university. She recalled that customers weren't taking on too much debt, took pride in repaying their loans and saved for a rainy day.

"Those were great days in banking. I hope that when we come out of this crisis we reacquaint ourselves with those values," Bair said.

Bair, who said she is a lifelong Kansas Republican, told the audience she would like banks to require more evidence that a borrower is ready for homeownership and can repay the debt. Loans should be made only if borrowers have a portion of their own money at risk, too, she said.

"I do worry that we really don't have these protections in place. I worry the party will get started again if we don't have these changes in place," Bair said.

Bair, a native of Independence, Kan., said financial reforms under consideration in Congress are a start toward restoring the U.S. banking system's values but that there is still resistance toward greater transparency in the markets.

That legislation intends to address weaknesses in the financial system that led to the crisis. It aims to increase consumer protections on loans and credit cards, add restrictions to previously unregulated financial products and find ways to dismantle failing firms without resorting to taxpayer bailouts. The House has already passed its version of the bill.

Republicans have said the legislation, backed by President Barack Obama, would perpetuate bailouts rather than end them.

Bair pointed to the system now in which the FDIC shutters smaller failing banks that are insured by the federal government and sells them off. "They take their losses, but taxpayers don't take the exposure," Bair said.

The legislation would set up a similar system for large institutions. It would establish a fund, paid for by the firms, meant to cover the costs of liquidation.

Republicans contend taxpayers could still be on the hook and that emergency loan authority by the Federal Reserve could also amount to a financial bailout.